Power Play; Consumer group’s lawsuit underscores the PUC’s shift away from what some saw as a pro-ratepayer stance

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The San Diego Union-Tribune

San Diego’s Utility Consumers’ Action Network, which exists solely to fight corporate utility abuse, typically appeals to the California Public Utilities Commission to block business excesses and provide relief to ratepayers.

Yet instead of targeting San Diego Gas & Electric or SBC Communications, the consumer group late last month filed suit against the utilities commission itself.

UCAN has had differences with the commission before. But the group’s lawsuit challenging a commission decision awarding $173 million to SDG&E underscores a decided shift at the PUC.

Since the appointment of Michael Peevey, a former gas and electric utility executive as PUC president last December, the commission has tilted from a position most observers characterize as ardently pro-consumer to one much less likely to upset big business interests.

Consumer advocates say that it was Peevey, 65, who led the commission to reverse a position it long held by agreeing to award the $173 million in disputed profits to SDG&E, though Peevey insists it was a PUC attorney who initiated the settlement.

Consumer advocates also say it was Peevey who led the commission to expand the ability of large power users to obtain cut-rate electricity, while homeowners pay higher rates and hangover costs from the power crisis.

And it is Peevey, say opponents of the controversial Valley-Rainbow power line in North County, who has supported SDG&E‘s efforts to revive the stalled project.

Peevey said the SDG&E profits were among a host of matters he believed were important to resolve. The commission needs to stabilize the climate for both energy and telecommunication utilities, he said, as well as reinvigorate itself after struggling through the electricity crisis.

“I want to restore the commission to its position as the best or one of the best in the country,” he said.

Peevey said the commission should emphasize renewable energy — generated from wind, sun or other non-polluting sources — and energy efficiency. He also wants to restore the responsibility of utilities to buy power for their customers, a role the failed state deregulation plan had given to power suppliers.

Peevey’s initiatives are frequently opposed by the person he replaced as president, Loretta Lynch, a 41-year-old litigator who remains on the commission.

The difference in orientation between Lynch and Peevey is apparent in their reflections on the energy crisis.

Peevey, who joined the commission after the peak of the crisis, said the PUC ‘s biggest error was its failure to cut deals with power providers early on, as prices began to rise. Those prices, which were some 40 percent higher than the state had been paying, were lower than prices the state
ultimately agreed to pay.

But Lynch, who pushed the PUC to play a leading role in seeking sanctions against power suppliers for market rigging during the crisis, opposed cutting deals with companies that were manipulating prices.

She said her greatest regret is not moving to scrap deregulation sooner.

“We could not tinker with a deregulation fix but had to reregulate for the sake of the economy and the ratepayers,” said Lynch, a former white-collar defense attorney, as well as an advocate for the homeless.

Doug Heller, of the Foundation for Taxpayer and Consumer Rights, said there’s a big difference between the PUC under Lynch and the commission under Peevey.

“He is a deregulator, not a regulator, and as a result there is no hope for consumer protection; there is only corporate protection,” Heller said. “Despite the very large mistakes that were made when Lynch was president, we are witnessing a sea change of epic proportions.”

A representative of the energy industry said a sea change is just what’s needed.

“We see a commission under Peevey that is much more solution oriented and more directed toward trying to get specific proceedings done and move forward,” said Jan Smutny-Jones, executive director of the Independent Energy Producers Association.

This approach will not only benefit “my members but ratepayers as whole,” he said. “It looks like the adults are back in charge.”

Creating a utility commission nearly a century ago was among the crowning achievements of the Progressive movement. First known as the railroad commission, the panel’s oversight was quickly broadened to include electric, gas and telephone utilities. Now the commission also oversees water issues, moving companies and limousine services.

The five members are appointed by the governor, subject to confirmation by the state Senate.

Despite the nationwide movement to deregulate, the California commission retains a vast arsenal of regulatory tools. The PUC can conduct detailed audits of company financial records, approve or reject projects, levy fines and determine the level of profit a company can earn.

The California commission has a staff of some 860 employees and an annual budget of about $1 billion. Upcoming budget cuts are expected to cause staff losses, just as the commission wrestles with the reregulation of electric industries and its effort to ensure consumers are treated fairly by
a rapidly evolving telecommunications industry.

That’s a nationwide trend, however.

“I have been here for 25 years and this is about as bad as I can remember,” said Charles Gray, executive director of the National Association of Regulatory Utility Commissioners.

“Rarely has there been as busy and stressful a period in the regulatory community.”

Peevey arrived at the commission following what most experts say was an uneven effort during the electricity crisis. Commissioner Geoffrey Brown said the PUC struggled during most of the crisis, when most authority to regulate shifted to the federal government.

He believes the commission made a critical mistake by failing to clearly define the ability of SDG&E and other utilities to buy power under long-term contracts early in the crisis, a move others argue would have rewarded the suppliers later found to be manipulating the market.

But Brown gives the Lynch-led commission credit for raising rates during the crisis to deal with growing power bills. Brown said Peevey has brought balance to the PUC.

“I think Peevey is more centrist and pro-business than Lynch by a long shot,” Brown said. Though he has disagreements with Peevey, Brown believes the commission is more properly balanced under his leadership.

“I have authored some large fines against business, but if business has some reason for doing things, you have to listen,” he said.

“I have seen Lynch and (Commissioner) Carl Wood impose fines on companies that were awfully expensive, but when you look at the facts the infractions were understandable so smaller fines were appropriate.”

But Brown also emphasizes all current members of the commission were appointed by Democrat Gov. Gray Davis. He said a very different commission would emerge, tilted toward utilities, if a Republican governor is elected.

For his part, Wood said Peevey’s style differs sharply from Lynch’s.

“Lynch is a litigator and she was very successful and talented at it. As a litigator you go for the throat — at some point you negotiate — but you advocate for a position and you try to win,” Wood said.

“Peevey’s approach is to work something out and have it approved by the commission. He is more conservative than I am and his default position is to look for some accommodation with business interests.”

Michael Shames, executive director of UCAN, first clashed with Peevey over his advocacy of a merger between SDG&E and Southern California Edison in the late 1980s.

Shames said Peevey prefers backroom dealing to the open processes the PUC is supposed to provide. Peevey’s handling of the SDG&E case is a case in point, said the consumer advocate.

For nearly two years, the commission insisted that SDG&E should refund to customers the $375 million it earned in profits from selling electricity during the crisis. In UCAN’s lawsuit, the group argued that the PUC‘s position was consistent with state law, which appeared to bar SDG&E from
retaining profits from power sales during the crisis.

The local utility earned the profits from reselling electricity it bought during crisis, while it told the public it was passing along the cost of electricity without markup. SDG&E profited only from delivering power to homes and businesses.

But when the commission discovered the profits and ordered them credited to customers, SDG&E filed suit arguing that the profits belonged to its shareholders, not its customers.

The filing of the suit opened a new avenue for resolving the dispute: non-public negotiations, which the PUC can engage in to settle litigation.

Out of those settlement talks came the agreement on awarding nearly half the disputed profits to SDG&E. Lynch insisted the settlement was sprung on the commission with little notice and approved by a vote of 3-2, with Wood joining her in opposition.

“That was a backroom betrayal,” Shames said. “Peevey will insist there was risk and there is also principle, and the principle is that the PUC should not use the threat of the courts as the basis for abandoning proper and sound policy.”

Peevey insisted he is trying to bring openness and transparency to commission dealings. But the PUC president said he was convinced by PUC attorneys that there was a chance SDG&E would prevail in court, leaving customers with none of the disputed profits.

The commission has been similarly split over telecommunications issues. Lynch remains rankled, for example, over her removal by Peevey from a key case.

Under rules set up in the early 1990s, the PUC is charged with reviewing the performance of telephone companies. The commission also has the mandate to ensure that companies such as SBC share certain profits with ratepayers.

The incentive plan requires 50 percent of any earnings over a set amount to be refunded to customers via a credit on their phone bills. To prevent new services such as voice mail or call waiting from being subsidized by consumers paying for basic service, accounting procedures were put in place.

Lynch was in charge of both aspects of that case and had overseen a review of SBC’s service, working with an administrative law judge who issued a report that was highly critical of the company.

In addition, Lynch had commissioned an outside audit of SBC to make sure the company had properly reported all of its profits and operating expenses.

In March, Lynch was poised to issue a decision finding that SBC had underreported its profits by about $2 billion. But Peevey pulled the case from Lynch and reassigned it to Commissioner Susan Kennedy. Three other cases also were reassigned to other commissioners.

Lynch said politics drove the case shuffle.

“I had four major cases reassigned from me I felt for substantive policy differences,” she said.

Peevey is exasperated by that characterization. The reason for the reassignment, he said, had nothing to do with politics but rather with each commissioner’s caseload.

Commissioners divide up the work, with each taking the lead on a certain number of cases. While Lynch had 30 percent of the cases, Peevey had 16 percent and Kennedy 12.

Whatever the reason for the reassignment, Kennedy came up with a decidedly different take on SBC’s service performance as well as how much of a refund it should provide customers.

Contrary to the conclusion of the administrative law judge while Lynch was president, Kennedy found that SBC’s service was generally good.

According to the Los Angeles Times, Lynch had been prepared to order a $1 billion refund to SBC customers. But administrative law judges working on the case under Kennedy found that SBC had underreported its profits by $1.1 billion and recommended customer refunds of about $660 million.

Kennedy, who is frequently allied with Peevey on commission split decisions, is proposing scaling that back to $162.4 million.

SBC said it has no comment on the change in leadership at the PUC, but it did find fault with the audit Lynch had commissioned reviewing its finances for possible refunds.

“It was not an objective audit. It was an advocacy audit,” said Emery Borsodi, SBC’s point person on the profit-sharing issue.
Contact the authors:
Craig Rose: (619) 293-1814; [email protected]
Jennifer Davies: (619) 293-1373; [email protected]

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